Prosus’ dance with the devil

Naspers and Prosus management destroyed tremendous shareholder value under chief executive Bob van Dijk, clearly illustrated by its $1.8 billion Stack Overflow acquisition two years ago.

On Monday, Naspers and Prosus announced that Van Dijk has, with immediate effect, stepped down as CEO and his board positions of both companies.

No reason was given for Van Dijk’s departure, which caused speculation that he was booted out because of his poor performance in recent years.

Merchant West Investments Value Fund manager Piet Viljoen previously said Naspers management destroyed tremendous shareholder value.

In their latest trading update, Naspers and Prosus revealed that they expect their headline earnings per share to drop between 74% and 82%.

Commenting on the latest results, Viljoen said Naspers’ management neglected to say they destroyed this value through poor deals.

He said Naspers bought a 46.5% stake in Chinese Internet company Tencent in 2001 for $32 million – an investment which made it the multi-billion company it is today.

Tencent became a cash cow for Naspers. The new Naspers management team inherited this cash cow and decided to look for the new Tencent.

However, the cash was incinerated through numerous bad investments and stupid deals, and shareholders lost out.

Despite the bad deals, the new management team became fabulously wealthy along the way. It created unhappiness among many shareholders.

The new management team veered away from former Naspers CEO Koos Bekker’s strategy to buy large, non-controlling stakes in fledgling businesses in emerging markets.

A good example of one of these poor deals is Prosus’ 100% acquisition of Stack Overflow in 2021 for $1.8 billion.

Stack Overflow is a global technology-focused online forum where users can share ideas and provide technology-based assistance. It boasts over 100 million monthly visitors.

However, unlike many of Prosus’ previous investments in emerging markets, Stack Overflow is a New York-based company.

It also bought the company from some of the biggest names in the technology venture capital market, like Andreessen Horowitz, Silver Lake Partners, and Union Square Ventures.

Clearly, Van Dijk and the Prosus team were confident that they knew better than the Silicon Valley giants.

Prosus paid $1 billion more for Stack Overflow than its valuation a year before, which showed why firms like Andreessen Horowitz were happy to let it go.

Castra chief investment officer Pieter Hundersmarck told Koos Bekker’s Billions author TJ Strydom that the deal looked like value destruction.

When Prosus acquired Stack Overflow, it generated around $77.5 million in annual revenue. It equates to a price-to-sales (P/S) ratio of 23.24 times.

This means that Prosus paid the equivalent of 23 times Stack Overflows’ annual revenue to acquire the online forum.

To put this in perspective, Prosus is trading at a price-to-sales ratio of 1.17 times. At the P/S valuation of Prosus, Stack Overflow needs to generate revenue of $1.54 billion.

The extremely high price Prosus paid for Stack Overflow resulted in what many analysts predicted – write-downs in Stack Overflow’s value.

Less than a year after Stack Overflow’s purchase, in the 2022 annual results, Prosus wrote down $246 million of its value.

In its latest 2023 annual report, Prosus indicated that it had written off an additional $560 million of Stack Overflow’s value.

In less than two years, Prosus threw $806 million down the drain by purchasing a company at a ridiculous valuation.

This is equivalent to R15.25 billion destroyed by Naspers and Prosus management.